The U.S. Federal Reserve has announced it will start buying up billions of dollars of government bonds as part of a new trillion-dollar effort to revive the economy.

The unprecedented measures are aimed at lowering the cost of borrowing across the economy and getting banks to lend more. And the measures are certainly dramatic -- they could double the Fed's balance sheet to an estimated $4 trillion this year.

Among them, the Fed said it would buy up to $300 billion of longer-term government debt in an effort to boost the economy. In effect, it's creating new money.

"Obviously these are large amounts, this is designed to make the monetary easing bite as much as possible now that interest rates are down are very low levels," says Patrick Minford of Cardiff Business School.

Lowering interest rates is the main tool a central bank has for boosting the economy. But in the Fed's case, rates are about as low as they can go. It's main interest rate is now between zero and 0.25 percent.

Power Of The Press

With no scope to cut further, they're turning to more unconventional methods instead.

In buying up government bonds, the aim is to drive up their prices and lower their yields. Since government bonds have an effect on other types of debt like mortgages, those rates should come down too.

And banks newly flooded with money should then lend that on to borrowers. However, there's no guarantee of that. Banks could simply continue to hoard the cash

In fact, the Fed has already been engaged in a form of "quantitative easing," in recent months buying up mortgage-related securities, whose value slumped with the U.S. housing market collapse.

On March 18, the Fed said it would do more of that too -- up to $850 billion more. And, indeed, the announcement did push down yields on U.S. government securities, as well as rates on U.S. home mortgages.

But will the policy be successful in the long run? Kornelius Purps of Unicredit in Munich believe it will. "The Fed has the printing press and others, me and Warren Buffet, do not have the printing press and in the end the Fed will win any fight," he says.

Threat Of Inflation

But that raises the chief danger of this kind of policy -- what if too much money is pumped into the economy? That could unleash inflation down the road.

Purps says unfortunately there is no method to solve the current problems -- recession, deflationary worries, the banking crisis -- that are not inflationary.

In its statement the Fed said it expected inflation to "remain subdued." The Fed's calculation, it seems, is that that is a problem for another day.

"Frankly, the risk of the recovery getting too strong and causing inflation in the future is one we'd dearly like to have at the moment," Patrick Minford says. "The threats are all really the other way."

Still, turning on the printing presses -- even electronic ones -- raises worries, too, about the impact on the dollar.

The dollar had rallied late last year as investors fled risky markets for "safe havens." The worry is the flood of dollars could see the dollar lose all that ground and weaken further.

Certainly, after the Fed's announcement it saw its biggest one-day drop in more than 20 years.

But while many are pessimistic, Purps sees one possible glimmer of hope for the greenback: If the U.S. economy is in a bad state, other areas aren't faring much better.

Already the Bank of England has embarked on a similar course to that of the Fed, buying up British government debt beginning this month. The Bank of Japan expanded its purchases of government bonds this week. Analysts say other central banks may follow suit.

World Economic Crisis

Multimedia coverage on the impact of the global financial crisis on markets and individuals across RFE/RL's broadcast region. More